Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about tax complications from falling share values after death.
‘A client died earlier this year. His estate was worth about £2m, of which a large part comprises quoted shares. Since his death, the stock market has fallen and the shares lost value. We therefore completed a form IHT35 and claimed a repayment of inheritance tax based on the difference between the sale proceeds of the shares and the original date of death valuations. The share values were ascertained for inheritance tax so the same value must now be used for capital gains tax purposes.
The share sale proceeds exceeded £500,000 so a tax return is required. In calculating the gain, there will, in any event, be a loss because the IHT35 did not reflect stockbrokers’ charges and incidental costs of sale, whereas the sale proceeds do. Further, statement of practice 2/04 will increase that loss because this allows for the incidental costs of acquisition by the executors.
In this case, such costs will be £8,000 divided between the assets in proportion to their probate values. My problem is that the probate values of the sold shares have now changed so, presumably, I must recalculate the total value of the estate to get to the new and correct denominator in my fraction, rather than use the original probate value. Is my understanding correct? Also, should the approach be different if the shareholdings have been assigned to the beneficiaries before sale rather than being sold by the executors?’ Query 19,624 – Bear.
Terry Jordan’s reply: The original apportionment of the £8,000 may not need to change.
‘IHTA 1984, s 178 to s 189 provide relief from inheritance tax if shares are sold at a loss within 12 months of death. All sales in the relevant period are aggregated so there can be an advantage in deferring sales of any shares that have increased in value.
As Bear is aware, for capital gains tax purposes the value ‘ascertained’ within the meaning of TCGA 1992, s 274 is the sale value by virtue of IHTA 1984, s 187 and the disposals will give rise only to small losses being the costs of disposal because it is the gross proceeds that are substituted as the acquisition values, not the net. Personal representatives are entitled to deduct a proportion of the costs of valuing an estate for probate purposes – see CIR v Richards’ Executors (1971) 46 TC 626. The scale of permitted deductions is set out in statement of practice SP 02/04 and is a flat £8,000 on an estate with a gross value between £1m and 5m. The personal representatives can claim more than the scale deduction if they can show that the actual cost was higher.
The statement of practice refers to ‘probate value’, for which see HMRC’s Capital Gains Manual at CG32220.
While not free from doubt, it may be argued that the original apportionment of the £8,000 across the date of death values does not need to be disturbed.
HMRC’s Inheritance Tax Manual at IHTM34161 sets out the rules if the shares were transferred to beneficiaries.
Thus, such transfers might prejudice the availability of the relief on subsequent sales, although the beneficiaries would be entitled to add the costs of transfer to their acquisition values.
While not directly relevant to the query, crypto assets such as bitcoin are problematic. HMRC’s policy paper updated on 20 December 2019 states that they are property for inheritance tax purposes and that gains and losses are broadly to be treated for capital gains tax purposes as if they were shares. However, so far as I am aware the inheritance tax loss on sale provisions do not apply. Ignoring the nil rate band, an estate comprising solely of £5m of bitcoin on death could be rendered valueless if the assets were subsequently sold for £2m; a not impossible scenario given the volatility of the asset.’
The article is also available on the Taxation website.
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